European Monetary System (Hansard, 6 November 1986)

§ 6. Mr. Maclennan
asked the Chancellor of the Exchequer what recent discussions he has had with the President of the Bundesbank concerning sterling's relationship with the exchange rate mechanism of the European monetary system.

§ The Chancellor of the Exchequer (Mr. Nigel Lawson)
I have discussed the European monetary system with the president of the Bundesbank on a number of occasions.

§ Mr. Maclennan
Does the Chancellor of the Exchequer accept that if his import-inducing consumer boom continues to rip sterling may again come under pressure? In that eventuality, would it not be better for the Chancellor to cover himself within the exchange rate mechanism than to rely on the uncertain bounty of the Bundesbank?

§ Mr. Lawson
There is much to be said for fully joining the European monetary system. One of the reasons for joining the system is not the soft option which the hon. Gentleman implied. It would not be a soft option.

§ Mr. Dykes
If France and Germany are in the EMS as larger and stronger economies, why cannot we join it?

§ Mr. Lawson
France and Germany do many things which we do not necessarily do, as much as I respect the Republic of France and the Federal Republic of Germany. My hon. Friend's support for our membership of the European exchange rate mechanism is well-known and consistent. We keep this matter regularly under review. The balance of argument has shifted considerably, but the Government have not yet decided that the time is tight.

§ Mr. Robert Sheldon
As everybody knows of the differences of opinion between the Chancellor of the Exchequer and the Prime Minister about joining the monetary exchange rate mechanism, will the Chancellor accept that in this instance, perhaps uniquely, the Prime Minister may be right, and that if we were to join, despite the obvious advantages of a fixed currency, we would be closely tied to the German deutschmark, with the problems that that would entail?

§ Mr. Lawson
The right hon. Gentleman is extremely percipient in noting that if we were to join the EMS fully sterling would be linked to the deutschmark.

§ Mr. Maples
When my right hon. Friend the Chancellor next discusses the EMS with the president of the Bundesbank, will he discuss whether there might be some connection between the fact that bank lending in Germany is growing at only about 5 per cent. a year and their interest rates are under 5 per cent., whereas here bank lending is growing at about 16 per cent. and our interest rates are 11 per cent.?

§ Mr. Lawson
There are many reasons why German interest rates are lower than those in this country. One is that inflation is even lower in Germany — indeed, at present it is negative — than in this country. Another reason, and it is one to which I have alluded on a number of occasions because it is important, is that the markets can see that unit labour costs in this country are rising a good deal faster than in Germany and most of our major competitors.

§ Dr. McDonald
Will the Chancellor confirm that the figures published on Tuesday show that the fall of $668 million of gold and currency reserves was spent to hold off the rise in interest rates and thus save the Chancellor's face during the Tory party conference? If so, that is a shocking waste of the country's reserves.

§ Mr. Lawson
It is difficult to satisfy the Opposition. They complain when interest rates are high. However, when reserves are used tactically at a particular time to ensure that a rise in interest rates can be held to 1 per cent. and not 2 per cent., they complain about that.